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Christmas is around the corner, and the last bell is about to ring for 2023, so it’s a good time to sit back and look at what the year meant to business and insolvency.
When you look back at a whole year, as we all tend to do at this point, you usually see swings and roundabouts. By which I mean there always seems to be some sort of balance at play. Harder times for some tend to be countered by things being more favourable for others. The difficult months are often balanced out by better trading later (or vice versa of course). Last year didn’t seem to have that balance. It wasn’t quite as bad as some people expected, but it was still almost universally tough for business.
At the end of 2022 and into early 2023, many economists and think tanks were predicting a shrinking economy and an inevitable plunge into recession. Thankfully, we avoided a recessive economy and that is, of course, a very positive outcome. However, the economy was still unstable, erratic, and mostly unfavourable for almost everyone throughout the whole year. For many companies, running a business was like trying to row downriver while being pushed around by unexpected currents that left you stagnant at times before randomly dragging you through whitewater rapids. To be frank, yes, last year probably was as difficult for business as it seemed.
2023 brought a rise in company insolvencies that we cannot ignore. In fact, it was approaching levels not seen since the worst of the economic crisis in 2009. The third quarter of 2023 saw 6,208 company insolvencies, which was a 10% increase compared to the same quarter in 2022. Compulsory liquidations in Q3 were 14% higher than in the previous quarter and 46% higher than in Q3 2022. Administrations in Q3 2023 were also 11% higher than in Q2 2023, and 58% higher than in Q3 2022. As I am writing the November insolvency stats have just been released and they are not good pre-Christmas reading. Once again, they are rising and a concerning 21% higher than last year and this follows consecutive similar rises in previous months. Most worryingly it is also higher than pre-pandemic insolvencies. It is a real reflection of how difficult the business landscape is right now, that the market has not yet recovered enough to sustain so many enterprises. Unfortunately, as we discussed in a recent article, we now need to start to accept that this is a trend in insolvency numbers and not just a post-COVID blip.
Perhaps the most telling statistic is that most of the insolvency cases are Creditors Voluntary Liquidations and Compulsory Liquidations which suggests that SMEs are being hit the hardest.
The rise in insolvencies is a direct result of a year of an unpredictable economic situation nationally and globally. Inflation started the year in double figures and then peaked in February at 10.4% before falling, but it started falling slowly. I think we can all agree to point the finger at inflation as likely being the biggest financial problem faced by businesses and individuals last year. It was hovering around a much lower 4.5% in October though, and the good news now is that it looks like it will continue a downward trend. A lot of damage has already been done though and, as welcome as that drop may be, it could be too late for some businesses. For perspective in October 2020, it was at 0.7%. Since then, it has risen consistently. Last year was actually an accelerated continuation of years of rising inflation. Inflation dents consumer confidence and then after it falls, it will take a while for that confidence to return.
The other consequence of rapidly rising inflation was the intervention of the Bank of England (BoE) to attempt to control it. That meant raising the BoE base interest rate. The knock-on effect of this was higher mortgages and loans which not only impacted businesses directly but also discouraged consumer spending and continues to do so. This year millions come off fixed rate mortgages and could find themselves hundreds of pounds worse off.
Interest rates are currently looking more stable, which is a positive thing and will be a relief to everyone. As with inflation though, the damage has already been done and if the base rate does prove to be more stable, it will be stable at 5.25%. In comparison, In Late 2020 the Monetary Policy Commission voted to maintain a base rate of just 0.1% despite there being some early concerns about inflation. That speaks volumes about how much the rate has changed.
The recently announced national minimum wage increase of 10% comes into play in April. This will be a welcome boost for employees, but it will also adversely affect business costs. The introduction of the new pay rates will almost certainly lead to an increase in prices in some sectors and impact inflation. I think we are all wary of predictions after the last few years, but it seems likely therefore that any reduction in interest won’t come around until the end of 2024.
Energy prices soared throughout the year and the average 3 bed home now costs over £150 a month. Hopefully, a mild winter will help keep bills down a little but there is an energy cap increase due in January that will result in further increases. The impact on business of this rise in energy costs cannot be underestimated. We recently spoke to a company that was gathering quotes for supply after coming off a 3-year fixed rate. The best they were getting was £20,000 a year higher which for a small business is a massive hit.
It hasn’t been easy for anyone, but some industries have been hit harder than others. Some of the worst hit industries over 2023 were hospitality, construction, and retail, accounting for over half of all insolvencies. All of these rely to a lesser or greater extent on public spending, have significant energy costs, or both. Consumers with less disposable income shop around, spend less, and make budget cuts and that has made a significant contribution to lower sales in hospitality and the high street. In short, people are under pressure financially and that means they are spending less on non-essentials.
Finally, on a less statistics-based note, there has been a noticeable increase in the number of enquiries and questions we are getting about solvent liquidation. People seem more disposed to closing a solvent business and releasing the assets to retire or move on. Interestingly these enquiries are often coming from younger than expected directors. We are used to seeing 60+ owners looking to retire but we are now getting more and more enquiries from early to mid 50s directors. While I appreciate this is not exactly an empirical study, many of them seem to be saying that they are fatigued because of the last few years and they see another hard economic landscape coming next year. To put it simply, they have had enough of the tough times.
The predictions are that inflation, base rates and several other problematic factors will abate a little next year, and that is something to look forward to at least. The downside is that those economic issues are still there. While they are, they will impact the financial security of individuals and businesses. 2023 ended with some significant increases in insolvencies and while the underlying issues that caused them are still with us, it seems very likely that this pattern will continue. Certainly, we can expect continued high rates of insolvency some way into, and perhaps, throughout 2024. There may well be a recovery coming, but the indications are that it will be a slow process. Sadly, we need to accept that when that recovery finally comes, it will probably be far too late for many businesses. We also know from experience that insolvencies tend to rise after a recessionary period due to overtrading on the upside. Whatever way you look at it, it is not a happy picture for the coming year, and we are all going to need to be prepared for another rough ride.
As always, we are happy to help and we offer a free initial meeting if you think you are facing insolvency, considering solvent liquidation, or indeed any other of our services. It will also be worth keeping an eye on our website because from January we will be regularly rolling out free downloads, guidance, and information specifically created to help businesses survive in difficult times.
UPDATE 21-12-23